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Saturday, July 28, 2018

Is the War on Poverty Really Over?

The Council of Economic Advisers recently released a
report that began with the startling statement that the War on
Poverty is over and has ended in victory. Properly measured, says the CEA, the
poverty rate has fallen to just 3 percent.

Can such a low poverty rate, less than a quarter of the
official measure (12.7 percent for 2017), be in any way credible? The answer turns
out to be both “yes” and “no.”

There are, in fact, many different measures of the poverty
rate. In addition to the official measure, the Census Bureau also publishes a modernized
version called the Supplemental Poverty Measure, estimated at 13.97 percent for
2016. The Organization for Economic Cooperation and Development, a club of 36
middle- and high-income democratic countries, defines poverty as earning less
than half of a country’s median income. By that definition, the U.S. poverty
rate is 16.8 percent, the third highest in the OECD. Only Israel and Turkey
have higher poverty rates.

The official U.S. poverty measure, was devised in the late
1950s. Its creators began by estimating the cost of a minimum healthy diet. They
observed that poor families, on average, spent about a third of their income on
food, so they estimated that an income equal to three times the cost of the
minimum diet would be adequate to provide food plus other necessities. Income
was defined as money income before taxes. That definition has remained
unchanged over time except for adjustments for inflation.

Over the years, the official poverty level has been subject
to many criticisms. Here are some of the most important:

1.An accurate measure of poverty should use income
after taxes, not before, in order to reflect both the burden of taxes paid and the
benefits of tax credits received.

2.An accurate measure of income should include the
value of in-kind poverty programs, such as housing aid and SNAP (formerly food
stamps).

3.An accurate measure should take into account the
way in which savings and ownership of real assets (such as cars and houses)
affect the living standards of people with low current incomes.

4.The data sources used to estimate the official
rate undercount certain kinds of income.

5.The standard consumer price index used to adjust
the official poverty measure is an inaccurate measure of changes in the cost of
living.

6.More broadly, poverty should not be measured
according to an absolute standard, such as the cost of purchasing a fixed
basket of goods and services, but rather by a relative standard, such as half
the median family income.

The 3 percent poverty rate cited by the CEA takes several of
these points into account. It is based on research by Bruce D. Meyer of the
University of Chicago and James X. Sullivan of Notre Dame. That research, which
has been published in many well-regarded journals, focuses on the first five
criticisms in the list. Their most recently
released results are shown in the following chart.

The top line in the figure shows the official poverty
measure. After adjustment for changes in the standard consumer price index for
urban consumers (CPI-U), the official rate has been essentially flat, with ups
and downs over the business cycle, for half century.

The middle line in the chart recalculates the official
poverty measure using a different version of the consumer price index known as CPI-U-RS
but no other changes. CPI-U-RS is a research tool that attempts to reconstruct
historical values of the consumer price index as they would look if the current
methodology used by the Bureau of Labor Statistics had been used in earlier
years.

Two methodological changes account for most of the
difference between CPI-U and CPI-U-RS. Over time, BLS has improved the way it
measures the impact of changes in the quality of goods like automobiles and
consumer electronics. It has also changed the way it adjusts for changes over
time in the content of the basket of goods purchased by the typical consumer. Taking
these two changes into account, the standard CPI-U is estimated to have overstated
increases in the cost of living by about 0.5 to 0.8 percentage points per year.
That does not sound like much, but, as the chart shows, when those changes are
applied year after year, they add up to a big difference in the estimated cost
of living.

The lowest line in the chart shows Meyer and Sullivan’s own
measure of poverty. It, too, uses the CPI-U-RS as a deflator, but it goes much
farther than that. In an attempt to addresses the first three of the
above-listed criticisms of the official rate, Meyer and Sullivan estimate
poverty using data on consumption rather than income. That approach includes
that consumer goods and services purchased with tax credits, such as the Earned
Income Tax Credit, as well as goods and services obtained using SNAP debit
cards or housing vouchers. Finally, using consumption data captures consumption
goods that are purchased by drawing down savings and also the implicit
consumption services from homes and cars that a family owns. All of those
sources raise consumption but not its pretax income.

The switch from an income-based to a consumption-based
poverty not only changes the poverty rate, but also who gets classified as poor.
It does that by eliminating some people who have low incomes, but who would not
normally be considered poor in any meaningful sense. For example, a
consumption-based measure of poverty is less likely to count law or medical
students who maintain an above-poverty standard of living by borrowing against
the high earnings they expect in their careers. It is also be less likely to
include retired couplse whose current income is low, but who live comfortably
in houses they paid for during their working years, further supplementing their
standard of living by drawing down savings or borrowing against home equity. As
Meyer and Sullivan point out, those who are classified as poor by a consumption
measure are more likely to be those who are truly desperate.

Changing the basis for measuring poverty would have most of
these effects even if the data for both income and consumption were completely
accurate. Meyer and Sullivan make the further contention that the income data
are more likely to undercount resources available to the poor than consumption
data. If so, that would make the gap between the official poverty measure and
their own measure that much larger. It is worth noting, however, that not all
researchers agree. Among the skeptics are Katheryn Edin and H. Luke Shaefer,
authors of $2
a Day: Living on Almost Nothing in America. They summarize their doubts about the quality of the consumption
data used by Meyer and Sullivan in this
short blog post on their website.

Informative as it is, though, it would be wrong to treat the
3 percent rate as the definitive estimate of poverty, as the CEA report appears
to do. It is not just that other methods of measurement come up with higher
numbers, as we noted earlier. In addition, Meyer and Sullivan themselves make
it clear that the poverty rate obtained using the consumption approach depends,
among other things, on the year used to link their consumption measure to the
official measure. They also note that the rate of consumption poverty, and its
rate of decrease over time, depend on whether one uses an absolute or relative definition
of poverty. Three percent should properly be viewed as the lower bound of a
range of estimates that can be obtained using the consumption approach.

It is also important to point out that the reported decrease
in consumption poverty does not mean that the War on Poverty is “over” in the
sense that all but 3 percent of those who were previously poor have achieved
self-sufficiency. On the contrary. The steady decline of consumption poverty
that Meyer and Sullivan observe is, in large part, a result of the expansion of
antipoverty programs, especially the Earned Income Tax Credit, SNAP, and
Medicaid, the benefits of which are not picked up by the official measure.
Other things being equal, cutting back on those programs would send a
consumption-based measure of poverty rate back up again, despite the strong
economy.

In short, the War on Poverty goes on. It is heartening to
know that past efforts to aid the poor have not be entirely in vain, as one
might pessimistically conclude from the persistently flat trend of the official
poverty measure. However, many battles will yet have to be fought before
America’s prosperity is shared by all of its citizens.

1 comment:

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